Edited version of private ruling

Authorisation Number: 1011617648557

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Ruling

Subject: Capital gains tax (CGT) - absolute entitlement - bare trust

For the purposes of section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997), is the the property which was legally acquired by the company held on bare trust for the partnership?

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Relevant facts and circumstances

A property was legally acquired by the company.

You claim that the real estate agent and solicitor erred in that the property was supposed to have been acquired in the name of the partnership.

A declaration of trust was issued by the company. This references a purchasing error and declares that 'it holds the said land and all improvements thereon as bare Trustee for the Purchasers, and shall continue to hold and deal with said land at the direction of the Purchasers.'

No other trust document exists.

The intention is to sell the property as a house and land package.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-10

Income Tax Assessment Act 1997, section 106-50

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

All subsequent legislative references are to the ITAA 1997 unless otherwise stated.

A capital gain or capital loss may result if a CGT event happens to a CGT asset in which you have an ownership interest. CGT event A1 in section 104-10 happens if you dispose of your ownership interest in a CGT asset. You dispose of that interest if a change of ownership occurs from you to another entity.

In most cases, legal ownership is determinative of who owns the CGT asset for income tax purposes, and in the absence of evidence to the contrary, Taxation Ruling TR 93/32 provides that the property is considered to be owned by the person(s) registered on the title.

However, in some cases actual ownership of an asset may be shown to lie with the beneficial owner instead of the legal owner. Where it can be shown that there is an absolute entitlement to a CGT asset, as evidenced by a trust agreement, then the beneficiary of the trust will be considered the beneficial owner of the CGT asset, and therefore the actual owner for the purposes of the CGT provisions within the ITAA 1997.

Effect of absolute entitlement on beneficiary

Section 106-50 provides that for a beneficiary who is absolutely entitled to a CGT asset as against the trustee of the trust, any act done by the trustee in relation to the asset will be as if the beneficiary had done it.

Bare trusts

The term 'bare trust' usually refers to a trust under which the trustee holds property without any interest therein, other than by reason of holding the title to the property as trustee. A bare trust encompasses a trustee who has no discretion, only nominal legal control of the property, and one duty, namely to convey it on demand. The beneficiaries of a bare trust are not automatically afforded absolute entitlement to the assets of the trust, however they are able to more readily establish this status than beneficiaries of other types of trusts.

Implied trusts

An implied trust is a trust that arises from an un-expressed and presumed intention, or is enforced by a court as a result of surrounding circumstances. A bare trust may be implied.

Absolute entitlement and beneficial ownership

A beneficiary of a trust may be absolutely entitled to trust property if there is no other person with an interest in that property. Paragraph 10 of TR 2004/D25 states that the 'core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.'

Paragraph 74 of TR 2004/D25 states that 'a vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it.'

In relation to a beneficiary's indefeasible interest in a trust asset, paragraph 75 of TR 2004/D25 states that 'the interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event.'

Land not fungible

Section 106-50 requires identification of a specific trust asset that is held on behalf of a specific beneficiary. That is, each beneficiary must be able to point to the particular trust asset that belongs to them. An asset such as land raises particular problems where there are multiple beneficiaries because it is generally not possible to divide it without prejudicing the interests of other beneficiaries. While each beneficiary has an interest in the land, the asset held by the trust is the whole of the land. There is no direct matching of the asset to which a particular beneficiary is entitled and the asset held by the trust as required by section 106-50.

Where more than one beneficiary has an interest in the trust assets, absolute entitlement can only be established if the assets are fungible. Land is considered to be an asset that is not fungible.

Application to your circumstance

You claim that your real estate agent and solicitor erred in that the property acquired was supposed to have been acquired in the name of the partnership. Nothing was done to rectify this error until a declaration of trust was issued by the company to the effect that the property and any improvements thereon were held from the outset on bare trust for the purchaser (the partnership).

In essence, you are claiming that an implied bare trust was in existence at all times from the date of acquisition.

As per the general discussion above, the existence of a bare trust does not automatically mean that a beneficiary has absolute entitlement to the trust asset/s and therefore beneficial ownership of them. It is only when certain requirements are met that beneficial ownership is established.

In accordance with TR 2004/D25, a beneficiary must have a 'vested and indefeasible interest in the entire trust asset' and also be able to call for it to be transferred to them or at their direction.

In this case, even if we accepted the existence of an implied trust we do not accept that the partnership has beneficial ownership of the property because it is not absolutely entitled to it.

Even if we accept the existence of a trust, it is the case that any entitlement to trust assets held by the company lies with the partners in the partnership and not the partnership itself. There is, in effect, more than one beneficiary for the purposes of determining absolute entitlement.

As the asset in this case is property in which the partners each have a percentage interest in the whole of the asset (as opposed to absolute interests in say two separate distinct assets), which is not a fungible interest, neither partner has a vested or indefeasible interest because both have claims to the one asset.

Neither partner can take immediate possession of it or call for it to be dealt with as they direct because their interest may be able to be defeated by the actions of the other.

Therefore, in accordance with the guidance provided by TR 2004/D25, regardless of whether a trust arrangement was put in place the company has been the legal and beneficial owner of the property (and any improvements) from the date of acquisition in 2009 and will be subject to any taxing provisions upon the transfer of legal ownership. Section 106-50 has no application in this circumstance.